By Harvest Portfolios Group
Mike Dragosits, CFA
Canadians tend to think of Real Estate Investment Trusts (REITs) as office buildings and strip malls, both of which have been hit hard by the pandemic.
As malls and non-essential stores have been closed and more people work from home, there is less need for the space they offer. But in the new economy, where technology is a dominant theme, REITs have evolved to meet new demands. The pandemic’s impact has been an energizer for their businesses.
These areas include data storage facilities, communication towers, labs that enable medical research and the warehousing for storing and shipping goods which have been purchased online.
Image: Alexandria Center at Kendall Square via http://www.acks.com/100binney.shtml
And given that Canada’s publicly traded REIT universe is narrow and makes up just 3% of the world total, a global view of the sector offers a better combination of dividends and diversification.
“Going global with REITs offers three things,” says Mike Dragosits, portfolio manager at Harvest Portfolios Group Ltd. “You get more scale and quality. And you get greater subsector diversification as well as geographic diversification.”
Mr. Dragosits says the underlying philosophy of REIT ownership hasn’t changed: Real estate offers a defensive, diversified holding that adds stability to a portfolio. This is because REIT prices move in different ways than stocks and their lease-based revenue stream is typically less volatile. They also offer inflation protection.
Harvest launched the Harvest Global REIT Leaders Income ETF (TSX: HGR) in 2017 to capture this opportunity.
The ETF holds 30 developed market real estate issuers. As of May 31, 2021, the average market capitalization is US$26 billion. About 63% of the holdings are in the U.S., 14% in Europe, 11% in Australia, 6% in Singapore and 3% in Canada.
The holdings are broadly diversified by sector. Specialized and industrial REITs are 39%, residential and office are 20%, retail is 12%, healthcare related are 9% and casinos and resorts are 4%.
The dividend yield is 3.35% but the current distribution yield as of May 31, 2021 is 6.10%, enhanced by the Harvest covered call options strategy.
Mr. Dragosits says the size of the REITs in the Harvest ETF are much larger than Canadian REITs “and with size comes greater efficiency and opportunity.”
As an example, Prologis Inc., headquartered in San Francisco has been in business for 30 years, operates in 19 countries and has a $91 billion market capitalization. It is benefiting from the online shopping boom and needs for goods to be stored for shipping.
Another growth area is companies that provide services for the new economy such as data centers, communication towers and storage properties.
Two examples are Crown Castle International Corp. and American Tower Corp. Houston-based Crown Castle is one of the largest U.S. wireless tower companies with over 40,000 towers and approximately 80,000 route miles of fiber optic cable. Boston-based American Tower is the largest global owner and operator of wireless and broadcast communications towers.
Storage for cloud computing is another growth area. Here Digital Realty Trust Inc., another ETF holding, provides temperature-controlled facilities, with secure internet connections and high levels of data security for business interested in cloud computing and storage. Businesses rent space for their servers and computing hardware.
Digital Realty’s portfolio includes 210+ properties in 14 countries, including two in the Toronto area.
“We still maintain the secular growth theme of increased digitalization of the world, which suggests there’s going to be continued need for more cloud space, wireless connectivity, and e-commerce demands throughout the world,” Mr. Dragosits says.
Among the recent additions to the ETF is Safestore Holdings Plc, the UK’s largest and Europe’s second largest provider of self-storage. Storage REITs are benefitting from the pandemic-induced migration out of downtown cores to the suburbs.
“Even here in southern Ontario we’ve seen migration from Toronto into the suburbs and also into cottage country. Along with that comes needs for storage.”
In summary, Mr. Dragosits says the case for global REITs is the opportunity for high and stable income.
“We add a covered call writing program to boost the income and offer a global reach. Our REITs are providing bread and butter facilities for the broad economy so that is always in demand.”
For more on Harvest ETFs click here.
June 9, 2021